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Mid-cap Funds

All of us at some point have been hesitant to invest in stocks or actively participate in stock trading. The reason being, it’s too risky. Equity-oriented mutual funds give investors the opportunity to invest in stocks without trading in them. There’s a twin-benefit from this, you as an investor get an idea of how market movements affect stock prices at the same time reap benefits in terms of high rates of return on your investment.

Equity mutual funds group individual stocks based on companies’ asset size or ‘market capitalisation’. Market capitalisation (also known as market-cap) is calculated by multiplying a company’s total outstanding shares by the current market price of 1 share, this is nothing but the valuation of a company. There are 3 market-cap groups, large-cap, mid-cap, and small-cap. Investing in any or all of these brings with it its own unique risks and rewards.

Mid-cap funds are those that have a large part of their corpus allocated in stocks of mid-cap companies. These companies have an asset size between ₹5,000 and ₹20,000 crore. Stocks are ranked between 100-250 on the stock exchanges of India. Since mid-cap companies are small to medium enterprises, information tends to difficult to get publicly.

Investors who’re not so conservative and have a moderate tolerance for risk prefer investing in these funds. We recommend an investment horizon of 3-5 years for holding your investment in these funds. Fluctuating market movements (bullish or bearish) and spirals (upward or downward) have a moderate to high impact on mid-cap stocks. This also means stock prices and NAV are highly volatile. Price volatility means high risk; however, these funds give higher returns than large-cap stocks.

Mid-cap Investment Plans Recommended by Angel BEE:

Mid-cap investors who hold their investments beyond the lock-in period of 3 years have benefitted tremendously. Those who’ve stayed invested in mid-cap funds for more than 10 years claim, mid-cap stocks have outperformed large-cap stocks. These stocks are largely over- or under-valued because there’s very little research available. However, there are some facts which cannot be ignored.

Mid-cap mutual funds are ideal for investors with a moderate tolerance for risk. These funds yield higher returns on investment even though individual stocks tend to be highly volatile. Mid-cap companies are continuously growing and expanding, this growth potential is what drives NAV, which in-turn drives investment rewards. Past performance has shown, mid-cap stocks respond aggressively to market corrections. So, any upturn or downturn in markets makes individual stock prices highly volatile. However, if you’re a moderate and slightly experienced investor, you’ll prefer investing in mid-cap stocks. Here are our recommendations for of the best mid-cap fund plans:

Top Mid-cap Funds in India

Mid-cap funds tend to be risky due to highly volatile responses to market corrections. However, they do give higher returns than large-cap funds. Also, most market experts feel, unlike large-cap stocks where past-performance is key, mid-cap stocks tend to be unpredictable. Past performance of these funds is neither an indicator of good future performance, nor does it guarantee returns.

Time and again fund managers recommend holding these funds for longer periods rather than making a quick exit. This is because most companies are either expanding or exploring new growth avenues. This potential for recovery in mid-cap companies is what attracts moderate investors. At Angel BEE we have curated a list of Top mid-cap funds with a spotlight on growth potential and return on investment.

Everything You Need to Know About mid-cap Funds

Mid-cap companies are ranked between 100-250 in Indian stock exchanges, these are largely small to medium enterprises. The asset size of these companies in India is between ₹5,000 and ₹20,000 crore.

Mid-cap funds are those where the focus is primarily on stocks of mid-cap companies. The firms are well-established and have a huge potential for growth.

The general perception of mid-cap stocks is, they’re highly volatile and risky, however, not all stocks are the same. Fund houses curate mid-cap portfolios in a way that helps you as an investor mitigate risks associated with fluctuating NAV and volatile stock prices. At the same time, each portfolio ensures higher returns than large-cap funds.

Each fund has a diversified asset portfolio. Moreover, since 2018, SEBI norms stipulate a mix of a minimum 20% allocation of large-cap stocks in a mid-cap portfolio. The ability to recover losses from market corrections and a little exposure to large-cap stocks, make investment in these attractive to moderate or experienced investors.

Why mid-cap Funds?

Here are some reasons why mid-cap funds are an attractive investment option:

  • Less Information Leads to Better Returns: There’s an old proverb ‘curiosity killed the cat’, this however, does not hold true for mid-cap stocks. Evidence shows, lack of information on mid-cap stocks have helped increase individual stock prices. This, in turn, has had a positive impact on NAV, which has then positively affected mid-cap portfolio returns.

  • Re-Rating and Wealth Creation: Quality mid-cap companies have a higher potential for growth, which allows for ramping up their market-share. Most companies experience staggering growth volumes and profit margins, which gets them noticed. This is the phase when mid-cap stocks move up to becoming large-cap ones.

  • Opportunities for Growth and Expansion: Some mid-cap companies also cater to niche markets, this and a huge potential for expansion, make these interesting and attractive investment options. Typically, companies in the consumer retail space or those that are internet-based, fall under this market-cap.

  • High Volatility Coupled with High Returns: Mid-cap stocks tend to be highly volatile because they’re more sensitive to market corrections than large-cap stocks. Though this may appear to be highly risky, the return on investments of mid-cap funds proportionately higher. If you continue to hold your mid-cap investment for more than 3 years, you’re bound to get visibly higher returns than large-cap funds.

Get Better Returns with mid-cap Funds

We recommend mid-cap mutual funds only for seasoned investors or investors with a moderate appetite for risk. Even though the information is limited, you can take advantage of the gap in information to make calculated investment decisions. If you are planning to invest in these funds here’s what you need to know to get better returns:

  • Stay Invested: These funds essentially need an investment horizon on 5-7 years to maximise your returns. Since the companies in these stock portfolios cater to new or niche markets, they’re usually opportunistic. They need at least 3-5 years to get established in their new expansion, the stock prices will usually fluctuate more in the first few years and settle later. Stock prices of quality companies like Jubilant Foodworks have been known to jump 5 times in 5 years.

  • Understand the Risk Reward Ratio: You should invest in mid-cap funds only if you have a moderate appetite for risk. Even though stock prices of these funds tend to be volatile, the returns on investments are higher than large-cap funds. We recommend these funds only to experienced investors who have the stomach and patience to absorb erratic fund performance.

  • Stay Updated with Industry/Sector News: mid-cap companies will appear in the news from time to time especially if they expand or grow. Staying updated and aware about information which impacts mid-cap companies, especially the ones in your portfolio, will help in making calculated decisions about the future of your investments.

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